Answers of Even Numbers.

(FritZ Signabon)

2. a) Taxable income refers to the pertinent item of gross income specified in the NIRC,
less the deductions and/or personal and additional exemptions if any, authorized for
such type of income by the NIRC or other special laws. In other words, it refers to all
items of Gross Income less allowable deductions and exemptions authorized by law
(section 31 of the NIRC).

b) Gross income is that income which includes all income received that is not explicitly
exempt from taxation, under the Internal Revenue Code; while taxable income is an
income that is actually the subject of taxation. Deductions are subtracted from gross
income to arrive at the mount of taxable income.

4. Realization Principle is the concept that revenue can only be recognized once the
underlying goods or services associated with the revenue have been delivered or
rendered. The Supreme Court held in the case of Manila Mandarin Hotels Inc. vs. CIR
et.al., that revenue is generally recognized when both the earning process is complete
or virtually complete and the exchange has been taken place.

6. Capital gain refers to the gain derived from the sale or exchange of capital assets or
property whether or not connected with the trade or business of the tax payer other than
ordinary assets; while ordinary gain is that what derived from the sale or exchange of
ordinary assets.

8. a) interest income (for loans)

The test of source of income of interest income is the resident of the debtor. The
residence of the obligor who pays the interest rather than physical location of the
securities, bonds or note or the place of payment is the determining factor.

b) service/compensation for labor/personal service

The test of source of income of services is the place of performance of the

service. If the service is performed in the Philippines, the income is treated as from
sources within the Philippines, regardless of the residence of the payor, of the place in
which the contract for service was made, or of the place of payment.

c) Dividends from domestic and foreign corporation

The test of source of income of dividends is the residence of the corporation

paying the dividends. Dividends from a domestic corporation or from a foreign
corporation are treated as income from sources within the Philippines, unless less than
50% of the gross income of the foreign corporation for the three year period preceding
the declaration of such dividends was derived from sources within the Philippines, in
which case only the amount which bears the same ratio to such dividends as the gross
income of the corporation for such period derived from sources within the Philippines
bears to its gross income from all sources shall be treated as income from sources
within the Philippines

d) rentals

The test of source of income of rental is the location or use of the property or
interest in such property. If the property is located or used in the Philippines, the rents
are income from sources within the Philippines.

e) royalties

The test of source of income of royalties is the location or use of the property or interest
in such property. If the property is located or used in the Philippines, the royalties are
income from sources within the Philippines.

f) gain on sale of shares stock in a domestic corporation

The test of source of income of shares of stock in a domestic corporation is the place
where the sales contract was consummated. Gain, profit, or income is treated as
derived entirely from sources within the Philippines, regardless of where said shares are
sold (Mamalateo, 2014).

10. The three systems of taxation are as follows:

1). Global tax system is employed where the tax system views indifferently the
tax base and generally treats in common all categories of taxable income of the
individual;

2.) Schedular tax system is a system usually employed where the income tax
treatment varies and is made to depend on the kind or category of taxable income of the
taxpayer (Tan v. Del Rosario, Jr., 237 SCRA 324, 331); and

3). Semi-schedular or semi-global tax system. In this system, all compensation

income, business or professional income, capital gain, passive income, and other
income not subject to final tax are added together to arrive at the gross income. After
deducting the allowable deductions and exemptions from the gross income, the taxable
income is subjected to one set of graduated tax rate for individual or normal corporate
income tax rate for corporation.
12. Exclusions from Gross Income are as follows:

A. Exclusions under the constitution. Income derived by the Government or its

political subdivision is exempt from gross income, if the source of the income is
from any public utility or from the exercise of any essential governmental
functions.
B. Exclusions under the NIRC. The following are excluded from gross income
by the National Internal Revenue Code (NIRC): Gifts, bequests and devises;
Life insurance proceeds; Amount received by insured as return of premium;
Retirement benefits, pensions, gratuities, etc.; Income exempt under treaty;
Compensation for injuries or sickness; and Miscellaneous items (section 32,
NIRC as amended by section 9, R.A. No. 10963).
a) Gifts bequests and devises are excluded from gross income because the
consideration is based on pure liberality and is already subject to donor’s tax
as the case maybe, and there is no income derived in such transaction;
b) Life Insurance proceeds are not considered as income because they partakes
the nature of an indemnity or compensation rather than gain to the recipient.
Life insurance proceeds also serve the same purpose as nontaxable
inheritance;
c) Amount received by insured as return of premium. If the insured dies and the
beneficiary receives the life insurance proceeds, these are not taxable income
because they are excluded from gross income as proceeds from life
insurance;
d) Income of any kind, to the extent required by any treaty obligation binding
upon the Government of the Philippines is exempt from tax (NIRC, Sec. 32 B
[5]). It is not considered as gross income because of the principle of
reciprocity and for the purpose of lessening the rigors of international juridical
double taxation;
e) Compensation for injuries or sickness is excluded as gross income as they
are mere compensation for injuries or sickness suffered and not income. It is
intended to make the injured party whole as before the injury; and
f) Miscellaneous items such as gross benefits received by officials and
employees of public and private entities may be excluded from gross income
provided that the total exclusion shall not exceed P82, 000. The excess would
be considered as part of the compensation income of the employee where it
is subject on a schedular rate (NIRC, Sec. 32 B [7] e).

C. Income derived by foreign government. The exclusion from gross income may
be premised either on the principle of comity or upon the principle of reciprocity.
 D. Income derived by the government or its political subdivisions from the
exercise of any essential government function. These are excluded from
gross income because it derived through an exercise of the taxing authority for the
government.

E. Exclusions under special laws. This exclusion from gross income is expressly
laid down by a statute.

14. Letter A. (The Consultancy fees are not subject to Philippine income Tax). Being an
alien, it is subject to income tax only on income from sources within the Philippines.
Since the consultancy fees are received by him for designing a computer program and
installing the same in China, the same shall be treated as income from sources outside
the Philippines.

16. Letter B. Pierre de Saviny is a Frenchman who engaged business in the Philippines,
thus his income generated during his stay in the country is that of in the nature or status
of taxable income of a non-resident alien who engaged in trade or business in the
Philippines.

18. No. Since Hopeful Corporation exercised its right to redeem the property, Generous
Bank is not liable to pay capital gains tax on the foreclosure sale. The court held in the
case of Supreme Transliner, Inc., v. BPI Family Savings Bank, Inc , that a mortgagor
exercises his right of redemption within one year from the issuance of the certificate of
sale, no capital gains tax shall be imposed because no sale or transfer of real property
was realized.
It is only in case of non-redemption by Hopeful Corporation that the obligation to
pay capital gains tax arises, which shall be based on the bid price of the highest bidder.
The tax will be imposed only upon the expiration of the one-year period of redemption.
Furthermore, the obligation to pay the capital gains tax would primarily fall on the
mortgagor, Hopeful Corporation, and not on Generous Bank.

20. No. Income Tax Regulations provides that if a debtor performs services for a
creditor who cancels the debt in consideration for such services, the debtor realizes
income to that amount as compensation for his services.

In the given problem, the cancellation of Mr. Gipit’s indebtedness up to the

amount of Php 75,000.00 gave rise to compensation income subject to income tax,
since Mr. Maunawain condoned such amount as consideration for the general cleaning
services rendered by Mr. Gipit

22. Not all of the representation and entertainment expenses claimed by Golden Dragon
are deductible. Only those that are reasonable in amount and nature should be
deductible. It should be noted that the total expenses is P430,000.00 for the five (5)
investors or P86,000.00 each. What should be allowed is only a deduction in such
amounts that are reasonable under the circumstances but in no case shall all
deductions for representation and entertainment expenses [NIRC of 1997, Sec. 34 (A)
(1) (iv); RR 10-2002].

23. If I were Atty. Agaton, I would advise Mr. Patrick that if he reacquires his Philippine
citizenship and establish residence in the Philippines, he shall be considered as a
resident citizen subject to tax on incomes derived from sources within or without the
Philippines. [NIRC of 1997, Sec. 23 (A)] Consequently, the BIR could now tax him on
his income derived from sources without the Philippines which is the income he earns
from his U.S. business.

24. R.A. No. 10701 is valid and constitutional. A levy of tax is constitutional because it is
not intrinsically equal and uniform in its operation. The uniformity rule does not prohibit
classification for purposes of taxation. (British American Tobacco v. Jose Isidro N.
Camacho). Uniformity in taxation, like the kindred concept of equal protection, merely
requires that all subjects or objects of taxation, similarly situated, are to be treated alike
both in privileges and liabilities. Uniformity does not prevent or forbid classification as
long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the
categorization is germane to achieve the legislative purpose, (3) the law applies, all
things being equal, to both present and future conditions, and (4) the classification
applies equally well to all those belonging to the same class. (Rufino R. Tan v. Ramon
R. Del Rosario, Jr., 237 SCRA 324). All of the foregoing requirements of a valid
classification having been met and those which are singled out are a class in
themselves, there is no violation of the “Equal Protection Clause” of the Constitution.

26. No. Under Revenue Regulations No:3-2002, only an individual receiving purely
compensation income, regardless of amount; from only one employer in the Philippines
for the calendar year, the income tax of which has been withheld correctly by the said
employer, shall qualify for substituted filing of income tax return.

Daryl, within the same calendar year, derived income from producing short films; thus,
she did not receive purely compensation income for calendar year 2015. Accordingly,
the amount withheld from her compensation income is not equal to the income tax due
on his aggregate taxable income during the taxable year.
28. a) The separation pay and indemnity that will be received by the affected employees
as the result of their separation from service shall be tax exempt. Under section 32 (B)
(6) (b), any amount received by an official or employee or by his heirs from the
employer as a of separation of such official or employee from the service of the
employer because of death, sickness or other physical disability or for any cause
beyond the control of the said official or employee shall be exempt from taxation.

b. No, BATAS Law is not liable to pay the assessed percentage business tax.
Section 133 (i) of the LGC provides that the exercise of the taxing powers of local
government units such as the City of Valenzuela shall not extend to the levy of
“percentage or value-added tax (VAT) on sales, barters or exchanges or similar
transactions on goods or services” except as otherwise provided in the LGC; therefore
BATAS Law may not be assessed with and required to pay percentage business tax.

30. Amendments introduced by RA No. 10963 (Train Law) on individual taxation are as
follows:

1. It restructures the personal income tax (PIT) schedule, with separate

schedules for compensation income earners (CIEs), purely self-employed individuals
and/or professionals (SEPs) whose gross sales or gross receipts and other non-
operating income do not exceed the Value-Added tax (VAT) threshold of Three Million
and mixed income earners;
2. reduces the number of tax brackets from seven (7) to six (6);
3. exempts the first P250, 000 annual taxable income of tax payers;
4. sets the highest amount of taxable income at more than P8 million and
subjects it to a higher marginal rate of 35%;
5. repeals the provision on basic personal and additional exemptions and
premiums paid on health and/or hospitalization insurance which are deemed integrated
into the P250,000 exempt threshold;
6. retains the income tax exemption of minimum wage earners;
7. retains the exemption from tax of the de minimis benefits as well as the non-
taxability of mandatory contributions such as those made to the GSIS, SSS, PhilHealth,
Pag-IBIG Fund and union dues;
8. increases the amount of tax-exempt benefits ceiling (13th month pay and other
benefits) from P82,000 to P90,000;
9. imposes a 20% final tax on PCSO and lotto winnings exceeding P10,000;
10. removes the preferential tax rate of 15% for employees of regional area
headquarters, regional operating headquarters, offshore banking units and petroleum
service contractors and subcontractors;
11. increases the fringe benefits tax (FBT) rate from 32% to 35%; and
 12. inserts a provision that the optional Standard Deduction by general
professional partnership (GPP) may only be availed once, either by the GPP or the
partners comprising such partnership.